Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1,860,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate $1,950,000 in annual sales, with costs of $1,060,000. The project requires an initial investment in net working capital of $150,000, and the fixed asset will have a market value of $175,000 at the end of the project. Assume that the tax rate is 35 percent and the required return on the project is 14 percent.


Requirement 1:
What is the net cash flow of the project for the following years? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Enter your answers in dollars, not millions of dollars (e.g., 1,234,567).

Year Cash Flow
0 ________
1 _________
2 _________
3 _________

Requirement 2:
What is the NPV of the project?

To calculate the net cash flow for the project, we need to consider the initial investment, annual cash flows from sales, depreciation, taxes, and the cash flow at the end of the project. Here's a step-by-step calculation:

Year 0:
Initial investment = -$1,860,000
Initial investment in working capital = -$150,000
Cash Flow in Year 0 = -$1,860,000 - $150,000 = -$2,010,000

Years 1-3:
Annual cash flows from sales = $1,950,000
Annual cash flows from costs = -$1,060,000
Operating profit before depreciation and taxes = $1,950,000 - $1,060,000 = $890,000

Depreciation (using MACRS 3-year class rates of 33.33%, 44.45%, and 14.81%):
Year 1: $1,860,000 * 33.33% = $619,338
Year 2: $1,860,000 * 44.45% = $826,170
Year 3: $1,860,000 * 14.81% = $275,310

Operating profit after depreciation:
Year 1: $890,000 - $619,338 = $270,662
Year 2: $890,000 - $826,170 = $63,830
Year 3: $890,000 - $275,310 = $614,690

Taxes (35%):
Year 1: $270,662 * 35% = $94,731.70
Year 2: $63,830 * 35% = $22,340.50
Year 3: $614,690 * 35% = $215,141.50

Operating profit after taxes:
Year 1: $270,662 - $94,731.70 = $175,930.30
Year 2: $63,830 - $22,340.50 = $41,489.50
Year 3: $614,690 - $215,141.50 = $399,548.50

Net cash flow (operating profit after taxes + depreciation):
Year 1: $175,930.30 + $619,338 = $795,268.30
Year 2: $41,489.50 + $826,170 = $867,659.50
Year 3: $399,548.50 + $275,310 = $674,858.50

Year 3 additional cash flows:
Working capital recovery = $150,000
Fixed asset market value = $175,000
Year 3 total cash flow = $674,858.50 + $150,000 + $175,000 = $999,858.50

So the net cash flows for each year are:
Year 0: -$2,010,000
Year 1: $795,268.30
Year 2: $867,659.50
Year 3: $999,858.50

Now, to calculate the NPV of the project, we will discount these cash flows using the required return of 14%:

NPV = (-$2,010,000 / (1 + 0.14)^0) + ($795,268.30 / (1 + 0.14)^1) + ($867,659.50 / (1 + 0.14)^2) + ($999,858.50 / (1 + 0.14)^3)

NPV = -$2,010,000 + $696,725.27 + $664,826.84 + $673,_711.87

NPV = $25,263.98

The NPV of the project is $25,263.98.

To calculate the net cash flow of the project for each year, we need to consider the sales, costs, tax, depreciation, net working capital, and salvage value.

Year 0:
The net cash flow in year 0 is the initial fixed asset investment minus the initial investment in net working capital.
Net Cash Flow in year 0 = -1,860,000 - 150,000 = -$2,010,000

Year 1:
Sales: $1,950,000
Costs: $1,060,000
Depreciation: We need to calculate the annual depreciation using MACRS.
Assuming the MACRS class is 3 years, the depreciation will be as follows:
Year 1: 33.33% (Initial cost x 33.33%)
Year 2: 44.45% (Initial cost x 44.45%)
Year 3: 14.81% (Initial cost x 14.81%)

Depreciation in Year 1 = $1,860,000 x 33.33% = $619,380
Taxable income in Year 1 = Sales - Costs - Depreciation = $1,950,000 - $1,060,000 - $619,380 = $270,620
Taxes in Year 1 = Taxable income x Tax rate = $270,620 x 35% = $94,717
Net Cash Flow in Year 1 = Sales - Costs - Taxes + Depreciation = $1,950,000 - $1,060,000 - $94,717 + $619,380 = $1,414,663

Year 2:
Deprication in Year 2 = $1,860,000 x 44.45% = $825,570
Taxable income in Year 2 = Sales - Costs - Depreciation = $1,950,000 - $1,060,000 - $825,570 = $64,430
Taxes in Year 2 = Taxable income x Tax rate = $64,430 x 35% = $22,550.50
Net Cash Flow in Year 2 = Sales - Costs - Taxes + Depreciation = $1,950,000 - $1,060,000 - $22,550.50 + $825,570 = $1,693,019.50

Year 3:
Deprication in Year 3 = $1,860,000 x 14.81% = $275,046
Taxable income in Year 3 = Sales - Costs - Depreciation = $1,950,000 - $1,060,000 - $275,046 = $614,954
Taxes in Year 3 = Taxable income x Tax rate = $614,954 x 35% = $215,233.9
Net Cash Flow in Year 3 = Sales - Costs - Taxes + Depreciation + Salvage Value = $1,950,000 - $1,060,000 - $215,233.9 + $275,046 + $175,000 = $1,084,812.10

Requirement 1:
The net cash flow of the project for the following years is:
Year 0: -$2,010,000
Year 1: $1,414,663
Year 2: $1,693,019.50
Year 3: $1,084,812.10

Requirement 2:
The NPV of the project is calculated by discounting the net cash flows using the required return rate of 14%.

NPV = (Net Cash Flow in Year 0 / (1 + Required Return Rate)^0) +
(Net Cash Flow in Year 1 / (1 + Required Return Rate)^1) +
(Net Cash Flow in Year 2 / (1 + Required Return Rate)^2) +
(Net Cash Flow in Year 3 / (1 + Required Return Rate)^3)

NPV = (-$2,010,000 / (1 + 0.14)^0) +
($1,414,663 / (1 + 0.14)^1) +
($1,693,019.50 / (1 + 0.14)^2) +
($1,084,812.10 / (1 + 0.14)^3)

Calculating the above expression will give the NPV of the project.

To calculate the net cash flow of the project for each year, we need to consider the different components: sales, costs, taxes, depreciation, and changes in net working capital.

1. Year 0:
In Year 0, the net cash flow is calculated by subtracting the initial fixed asset investment and the initial net working capital investment from 0.
Net Cash Flow = -(Initial Fixed Asset Investment + Initial Net Working Capital Investment)
Net Cash Flow = -(1,860,000 + 150,000)

2. Years 1, 2, and 3:
In these years, the net cash flow is calculated as the difference between sales, costs, taxes, depreciation, and changes in net working capital.
Net Cash Flow = (Sales - Costs) * (1 - Tax Rate) + Depreciation - ∆Net Working Capital
Where:
- Sales = $1,950,000
- Costs = $1,060,000
- Tax Rate = 35%
- Depreciation is calculated using the MACRS method for a three-year class asset (you'll need to use the MACRS table provided):
- Year 1: Depreciation = Initial Fixed Asset Investment * MACRS Percentage for Year 1
- Year 2: Depreciation = Initial Fixed Asset Investment * MACRS Percentage for Year 2
- Year 3: Depreciation = Initial Fixed Asset Investment * MACRS Percentage for Year 3
- ∆Net Working Capital = 0 (assuming no changes after Year 0)

3. Year 3 (end of the project):
In Year 3, the net cash flow is calculated by adding the market value of the fixed asset to the cash flow after taking into account the taxes on the book value of the asset.
Net Cash Flow = Market Value of Fixed Asset - Taxes on Book Value of Fixed Asset
Where:
- Market Value of Fixed Asset = $175,000
- Taxes on Book Value of Fixed Asset = (Book Value of Fixed Asset - Salvage Value) * Tax Rate
- Book Value of Fixed Asset = Initial Fixed Asset Investment - Accumulated Depreciation
- Salvage Value = Market Value of Fixed Asset at the end of the project

Now let's calculate the net cash flow for each year:

Year 0:
Net Cash Flow = -(1,860,000 + 150,000)

Year 1:
Net Cash Flow = ($1,950,000 - $1,060,000) * (1 - 0.35) + Depreciation Year 1 - ∆Net Working Capital

Year 2:
Net Cash Flow = ($1,950,000 - $1,060,000) * (1 - 0.35) + Depreciation Year 2 - ∆Net Working Capital

Year 3:
Net Cash Flow = ($1,950,000 - $1,060,000) * (1 - 0.35) + Depreciation Year 3 - ∆Net Working Capital + Market Value of Fixed Asset - Taxes on Book Value of Fixed Asset

To calculate the NPV of the project, we need to discount the net cash flows using the required return rate. The NPV formula is as follows:

NPV = ∑ (Net Cash Flow / (1 + Required Return Rate)^Year)

Where ∑ represents the sum of the individual cash flows for each year.

Now you can calculate the net cash flow for each year and the NPV of the project yourself using the formula and the given values.